China Valuation Bubbles Face Further Squeeze In 2017

As smartphone penetration plateaus in China, Internet companies in China are eagerly hunting for the next major platform that will sustain continuous growth. But before the dawn of the next technological revolution, how to maintain growth momentum in such a saturated market is the biggest question for all players.

China Tech Insights, an industry research project established by Tencent Online Media Group in 2016, outlined some major trends and predictions for China’s tech industry in 2017. As valuation bubbles are squeezed out further, Chinese technology companies will adjust their globalization ambitions and search for growth in more niche markets, it said in a report.

Here are the top ten trends:

1. The time has come to shift towards historically less optimal market segments

In 2016, China’s mobile internet market in major cities largely lost its strong growth momentum. From e-commerce to on-demand services, tier-one cities in China have seen total penetration of all types of internet innovation. Thus, in 2017, Chinese Internet companies will pivot in search of further growth in niche markets.

In this wave we will see prospectors head into small- and medium-sized cities where users’ adoption of online services is growing alongside the development of the smartphone market. At the same time, teenagers and senior citizens will also attract quite a lot of attention from the industry. Services specifically designed to cater to their demands, such as online booking of nursing services, will begin to appear in the market.
2. Globalization is becoming an inevitable but risky choice for Chinese tech companies

Faced with the slowdown in the domestic market, Chinese tech companies will begin to search for opportunities in markets in other emerging countries. The strategy of copying successful domestic products and models to other markets will become a favorable choice for Chinese tech companies. Chinese smartphone makers, in particular, will begin to bet big money on emerging markets such as India. A few boutique mobile application developers will also find opportunities in developed markets by leveraging their Chinese DevOps experience, such as musical.ly. Overall, globalization will be an inevitable trend for all the Chinese tech companies that have been enjoying the benefit of a vast domestic market for years.

However, as new entrants into global competition, Chinese competitors will face challenges in all respects. Copyright violations and patent wars, as well as adapting to host communities and local regulations will be the most significant issues to be considered by Chinese companies localizing for each new market.

3. Valuation bubbles will be squeezed out in venture investment

Investors interviewed all agree that, compared with 2014 and 2015, the valuation of Chinese startups was more reasonable in 2016 – in a word, big bubbles have been busted. After the so-called “Winter of Capital”, both entrepreneurs and investors are tending to be more rational and more discreet on numbers.

But still, in trending investment categories, such as cutting-edge technologies, valuation can be a bit exaggerated. Several Chinese artificial intelligence startups, for example, have received the type of valuation they actually deserve in one or two years time as opposed to right out of the gate. However, with high expectations for the field, most investors still find the overvaluation in artificial intelligence pretty acceptable.

4. Chinese consumers are trading up

Consumption upgrades will emerge as a new concept in China’s economy. Chinese consumers will begin to prioritize quality ahead of price in their daily consumption, which will offer internet companies a wealth of opportunities in the saturated market. All areas pertinent to the improvement of quality of life, such as education, entertainment and healthcare, will see increasing demand from consumers in the market.

5. Online channels will still be significant for smartphone sales

2016 marked the success of offline smartphone distribution channels in China. Companies adopting a more traditional offline distribution model such as OPPO and vivo outshone internet hotshots represented most prominently by Xiaomi. This is mostly a result of Chinese smartphone makers’ expansion to China’s fast growing smartphone markets in small- and medium-sized cities where offline channels are still predominant.

However, as the digitalization of China’s retail industry continues, e-commerce will regain its significant position. A mastery of both online and offline networks will be a common goal for all Chinese smartphone makers.

6. Personalization will be the key for SNS

As the most popular type of app in China, social applications for mobile internet are reaching market saturation faster than any kind of app. The development of social network services in China is switching from a stage where the innovation of models was the paramount concern to a stage of comprehensive product optimization. In this next stage, the key to competition will be to satisfy users’ customized needs in order to achieve a personalized and optimized user experience for everyone. This also means that social platforms need to adopt an open strategy to introduce more services and content providers into their platforms to ensure every user will be able to find what he or she wants without leaving the platform.

7. 2017 will be a bloodbath for content providers

In this age of information explosion, a user’s attention is a rare resource. Middle- and upper-class Chinese readers today want to pay for high-quality content as opposed to getting low-quality content for free. Thus, there is now a chance for Chinese content providers and media platforms to use quality content for monetization.

But platforms and content providers will go through mutual selection first before they achieve mutual benefits. Incentive systems and traffic will be essential for platforms to attract and maintain a high-quality group of content providers. On the other hand, content providers will also have to go through a bloody battle to prove themselves in the competition for users’ fragmented and scattered attention. Additionally, internet companies’ involvement in the content production process will lead to co-opetition with existing media and content providers, creating even more fierce competition.

8. The fintech industry will see a chance for growth in a more organized environment

After a series of regulations on internet finance come out this year, the entire Chinese fintech sector will begin to accelerate the process of natural selection, i.e., survival of the fittest. The "Matthew effect" will also begin to exert its influence in the sector: Those mass platforms with a huge user base, extensive financial data and a technological advantage are better adapted to the current market, so the gap between these established players and smaller competitors will continue to widen. In the long term, startups will find it harder and harder to grow without significant technological breakthroughs.

An opportunity resides in the application of artificial intelligence in the sector. Using artificial intelligence to facilitate investors’ decision making processes will be a highlight in the development of fintech in 2017.

9. E-commerce platforms will compete beyond e-commerce

China’s major e-commerce platforms are now accelerating their integration with financial services. Serving both consumers and retailers, e-commerce platforms are leveraging their massive consumption data records to launch both personal finance products as well as supply chain financial support for vendors.

Another area that has attracted the attention of e-commerce companies is the business of content. Trending media formats including short videos and live streaming show great potential in generating traction in e-commerce and hence have become the new business focus for many Chinese e-commerce platforms including Taobao and JD.com.
10. Chinese companies will build up R&D to prepare for a global competition

Though the industry has reached a consensus that the fast-growth stage of the mobile internet is coming to an end, the next multi-billion dollar market has yet to emerge. As we discuss in the report, Chinese companies are making attempts to catch up with global leaders in technological development. However, it will still take some time before Chinese companies can lead the globe in technological development considering its current deficiency in preliminary research.

(This article is originally published at China Tech Insights. Follow China Tech Insights on Twitter @CNTechInsights.)